Wednesday, January 5, 2011

Mosaic (MOS) - Back in the Saddle

Fertilizer producer Mosaic (MOS) was my top dog position for much of latter 2007 into early 2008, often sitting at 6-7% of the portfolio.  While much of the rest of the market was falling apart after the October 2007 peak, there was a harbor of safety in the commodity space....until there wasn't.  After the blowup of commodities that started in mid 2008 - it, along with a host of companies across the commodities spectrum (and indeed the entire market) went into a death spiral.  In retrospect, once more the "front page" indicator worked like a charm in this space - no different than most investment crazes.  (be wary of the 'rare earth metal' cover story coming soon!)  [Apr 30, 2008: Finally (a Year Late) Fertilizer Hits the Front Page of the NYTimes; and an Interview with Mosaic CEO]  Much like auto companies/suppliers the fertilizer space has extremely high leverage with a supreme level of fixed costs.  So when business goes bad, it tends to go really bad - but when it is good, gross margins balloon, andmuch of the incremental revenue drops straight to the bottom line.
  • Mosaic's gross margin for the second quarter of fiscal 2011 was $768.3 million, or 29 percent of net sales, compared with $307.0 million, or 18 percent of net sales, a year ago
Now appears to be one of those times... the stock is up some 100% in just over 6 months and reported another very nice quarter last evening.   I keep saying it, but this feels like deja vu with latter 2007, early 2008 across the commodity space.

Frankly, I am shocked there was never a bid for Mosaic somewhere along the line the past 2 years - perhaps the 64% stake by Cargill poses problems for an outside investor.  At $33B in market cap, there are now far fewer potential suitors.

Interestingly, Mosaic was able to pull this off with potash prices down year over year - but phosphates still are the dominant product line.  Potash prices are still far off the crazy times of a few years ago.  [Apr 23, 2008: Potash Hits $1000 on Spot Market]  [Apr 2, 2008: Potash Makers Already Talking $750; Up from $625] [Mar 27, 2008: Canpotex Potash Contracts Secured with India @ $625]
  • Mosaic said today its average international selling price for potash in the second quarter fell to $331 a ton from $370 a year earlier.  Mosaic sold diammonium phosphate for $461 a metric ton in the fiscal quarter, up 61 percent from a year earlier.
Full earnings report here.

Via Reuters:

  • Strong demand for fertilizer driven by high U.S. crop prices helped Mosaic Co's (MOS) quarterly profit and revenue beat Wall Street's expectations.  With prices for corn and soybeans near multiyear highs, farmers have strong incentive to plant as much as possible, a process requiring more phosphate and potash fertilizer.
  • "I think people will focus on the high crop prices," Soleil Securities analyst Mark Gulley said. "It's hard to find a chink in the armor right now. The outlook is very solid."  It remains to be seen if U.S. farmers plant more corn than soybeans in 2011, Chief Executive Jim Prokopanko told Reuters, adding that the "fight for acres hasn't been fought yet."
  • "Everything on the horizon that we see is in support of higher prices," he said. "We really feel good and confident about the business. Demand is booming, and our outlook looks good from any angle."
  • Mosaic, which is majority owned by U.S. agribusiness giant Cargill, earned $1.03 billion, or $2.29 per share, in its fiscal second quarter, ended Nov. 30, compared with $107.8 million, or 24 cents per share, in the year-ago period.  Excluding gains from the 2010 sale of a stake in a Brazilian fertilizer producer, Mosaic earned $1.01 per share.   By that measure, analysts expected earnings of 91 cents per share, according to Thomson Reuters I/B/E/S.
  • Sales of phosphate, the second-most important fertilizer for farmers, rose 49 percent to $1.97 billion during the quarter.  For the fiscal third quarter, Mosaic expects phosphate volumes of 2.4 million to 2.7 million tonnes. 
  • Phosphate production has been curtailed in recent months due to the partial shut-down of a large Florida mine.  Returning the mine to 100 percent capacity is "one of our highest priorities," Prokopanko said. The company has an extension agreement in place with authorities to mine 200 acres through the end of March, he said.
  • To reduce dependence on its phosphate business, Mosaic is in the middle of a $5 billion campaign to boost its potash capacity by more than 5 million tonnes over the next 10 years.  For the fiscal third quarter, Mosaic expects to ship 1.9 million to 2.1 million tonnes of potash.
  • During the fiscal second quarter, sales of potash rose 69 percent. 
  • Mosaic's overall revenue rose 56.4 percent to $2.67 billion. Analysts expected $2.44 billion.

[Jan 18, 2008: One Lonely Voice Agrees with Me on Food Inflation]
[Jan 14, 2008: Beating a Dead Horse - Fertilizer]
[Nov 19, 2007: Revisiting "Analysts Still Doubt Fertilizer Stocks"]
[Oct 23, 2007: Analysts Still Doubting Fertilizer Stocks]

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